The Next Chapter in the Euro Saga Begins June 20th

Evaldo Albuquerque (May 26, 2011)

Central bankers must think they’re so clever. They’re always coming up with fancy words to disguise the real meaning of their actions.

Look at the Federal Reserve, for example. Since 2007, they have adopted the words “quantitative easing” for their monetary policy. Why not just call it “money-printing?” That’s what it is.

The same thing is happening in Europe.

The European authorities just came up with a new fancy word to describe a Greek default. They’re calling it: “debt reprofiling.”

But as creative as they might be, they’re not fooling anyone…

Everyone knows debt reprofiling is nothing more than a debt default. They’re just putting lipstick on a pig here. Only in this case, that “pig” is the euro.

With the European debt crisis now back in the spotlight, it’s critical to understand what’s going on in Europe. More importantly, we have to consider how this Greek tragedy will most likely play out.

It’s the only way to know where the euro is headed next. I have reason to believe we’ll see that direction on June 20th. So let’s get right into it…

Greek Tragedy Goes On and On

In February, I predicted Portugal would soon need another bailout because of the increased borrowing costs.

More specifically, I wrote “With interest rates on the rise, Portugal is not going to be able to hold on beyond the end of March.”

Sure enough, in the first week of April, Portugal requested a bailout.

While I was right about Portugal being the next shoe to drop, it didn’t have the effect on the euro I was expecting.

The euro actually rallied for the past couple of months, as traders ignored the debt problems, and focused solely on the prospects of rate hikes.

But it looks like the market is starting to realize the European debt crisis hasn’t really gone away. Greece is now back in the spotlight. So what’s going to happen next?

Greece May Default as Early as Next Month

Once again Europeans authorities can’t agree on how to deal with this ever-escalating debt crisis.

The European Central Bank (ECB) is against any kind of debt restructuring. I don’t blame them. After all, they hold a bunch of Greek bonds on their balance sheet. The ECB would have to take a loss if there was a restructuring.

But some European authorities, such as Jean-Claude Juncker, president of the Eurogroup of finance ministers, think a debt restructuring wouldn’t be such a bad idea.

The problem is they don’t have much time to reach an agreement.

Greece will default if it doesn’t get another bailout loan from the IMF. But the IMF said it will only disburse the money if Greece can secure some funds from the European Union for 2012.

European Finance ministers will be meeting on June 20th in what’s known as the Ecofin meeting. Heads of states will also meet on the 24th.

They must have a solution by then! If they don’t, the IMF won’t disburse more money, and Greece will run out of cash.

But there’s good reason to believe they won’t let any EU country default. At least not this year.

At the End, EU Authorities Will Do What They Do Best – Bail Them Out

It’s very unlikely Greece will default now.

EU authorities will do what they do best: kick the can down the road. They will once again buy time by buying Greece out of trouble.

European authorities know they would be opening a Pandora box if there was any sort of debt restructuring.

The fear of more defaults would quickly spread to other countries, such as Spain and Belgium. With many European banks holding papers from those countries, this could lead to a banking crisis.

But we still have a month or so until the Ecofin. Until then, the news alone could force traders to sell off the euro in the coming days. In other words, the euro still has some downside risk.

Looking at the weekly chart, it does look like the euro is finding strong demand around 1.40 in the short-term. If the euro breaks below that level, it’s very likely it will move towards the trend line around 1.35-1.36.

Once the euro hits 1.40, you will have a great opportunity to short the euro, leading up to June 20th.

Euro is Testing Key Support Level

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Then After June 20th…

As a trader, I’m watching for the euro to go either way based on the Ecofin’s decision.

No matter what the European bankers and politicians decide, there will be plenty of opportunities on the long and short side in both the euro, and the smaller exotic currencies in Europe that follow the euro’s path.

For instance, if the authorities decide to bail out Greece and private investors don’t take any losses, it will likely mean the euro will get a short reprieve and could move higher.

If not, it will be open season on shorting the euro – and all the smaller European exotic currencies that track the euro like the Hungarian forint and Polish zloty.

Again, June 20th will be the key to the euro’s next move. I know I’ll be watching – and I recommend you do the same.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert